America Online Inc - 5 March 1998
2
Presentation Highlights:
Upbeat Presentation as Internet Emerges as Mass
Media Vehicle: Ted Leonsis, President of AOL Studios,
made a presentation at the ML Technology Conference this
morning. In his view, 1998 will be the year that the
Internet becomes a mass media vehicle. In the Dec.
quarter, AOL's primetime usage exceeded primetime
viewership at MTV and CNBC. Usage continues to
increase and is now at an average of 51.5 minutes/day/sub,
up from 41 minutes in Dec. 22MM e-mails are sent per
day to 70MM recipients. Women constitute 52% of usage
vs. 16% three years ago. AOL users household income is
2X the national average. Of e-commerce and AOL
merchandise sales in the Dec. quarter, 42% was from new
buyers. J Crew indicated that revenues generated through
AOL make it their second best store.
Balanced Revenue Stream Building: AOL continues
have a lot of momentum in e-commerce as well as
sponsorships. In calendar 1997, e-commerce revenues
were close to $360MM. The Tel-Save deal is going well
as 200,000 customers have been signed in a relatively short
time. Backlog of sponsorship type deals continues to build
and is closing in on $350MM. Ad revenue potential is
increasing although there is still some resistance among
older management at the agencies. AOL estimates that
based on 585MM page views a day at a $15/CPM, they
have the potential to generate $3.2BN in ad revenues;
while obviously a hypothetical exercise, it certainly
suggests upside. AOL currently has 22 of the top 50
national advertisers on its ad roster.
Price Increase Going Smoothly: Ted indicated that the
$2/mth price increase in subscriber fees to $21.95 is going
well. There appears to have been no big changes in churn.
Management believes that the 5 screen names vs. ISP's one
screen name coupled with unlimited usage and portability
are the attractions to the service.
International Scaling Beautifully: Run rate revenues for
AOL's international joint ventures are close to $400MM.
This business has scaled quickly and smoothly. AOL will
continue to partner with major players to grow overseas.
Multiple Brands are the Key: Management indicated that
there are few single title success stories out there. AOL
now has the AOL brand, CompuServe and is creating
additional brands. Digital City, AOL's local offering, is
one such example which is doing well. In 8 days, Digital
City New York achieved 1MM page views, a feat which
typically takes 16-22mos and $16-$22MM dollars. Local
and regional advertisers are more interested in reach and
transaction results than cost per thousands, in terms of
rates. Instant Messenger has been a tremendous success
and in a few months AOL will offer photo services,
allowing subscribers to create and send photo archives .
Competition: Management seemed more concerned with
the competitors who have yet to emerge than the current
competition. It is their sense that the phone companies,
cable companies and major entertainment companies have
not yet really weighed in. They watch Yahoo (YHOO D-2-
1-9 $72) carefully among others and expect a shakeout to
occur among on-line players. The point was made
regarding concentration within TV, cable and magazine
sectors, i.e. a few players have very high market share, and
they felt the same would hold for on-line. While AOL
takes competition seriously, they have a broader view.
First, it was concern about other on-line offerings (e.g.
Prodigy, CompuServe) and their major backers, then it was
a concern about Microsoft (a big customer now), then the
Web vs. on-line service and now concern about cable
modems, XDSL, or WebTV. Overall, AOL believes that
bandwidth is good, but only at a low cost. We believe
AOL is well positioned whatever way technology goes.
Content Creation Very Important: AOL still thinks the
value chain is moving towards content (from infrastructure
and packagers/distributors). AOL created Love@AOL for
next to nothing and it has become quite successful. It
proved that social contact is important. In the gaming
arena, there seemed to be frustration that game revenues
have not scaled as quickly as expected but management
believes there is still an opportunity for social
entertainment, i.e. Virtual Pool, where players can chat
while they play. Preview Travel is a deal AOL is quite
proud of; with a $3MM investment, they helped create an
interface for buying airline tickets, etc on line, got paid
$30MM for an exclusive long term contract and now own
20% of a company that is worth $250-$300MM.
[AOL] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[YHOO] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
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